However, returns of high-quality equities tend to lag during early-recovery phases. In that stage of the cycle, we often see a rally of lower-quality stocks, also known as a dash-to-trash rally. This doesn’t necessarily mean investors incur losses by holding quality stocks in such regimes, because the early recovery stage tends to boost share prices for almost all stocks (akin to “a rising tide lifts all boats”). Since we don’t believe that we are currently in an early economic recovery state, we believe the prospects for high-quality stocks remain favorable.
Certain quality factors will shine in different market environments. That’s because there’s a spectrum of quality features that are tied to growth, value and low-volatility vs. high-volatility factors. Knowing which ones are linked to a particular strategy enhances the odds that the return patterns they will experience through the ups and downs of a market will align with an investor’s expectations.
